The TRUTH About Tariffs
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2019-05-11 09:01 by Karl Denninger
in International , 519 references Ignore this thread
The TRUTH About Tariffs
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Ok, enough of the screamfest from farmers and BS.

Let's look at the MTS, the canonical source of facts in all things Treasury:

 

So over the first seven months we've collected $41 billion and change in duties over the $22 billion and change last year.  That's $19 billion smackers in additional tariff revenue.

Total ag exports to China are approximately $24 billion a year.

All of them.

Well, so will be the tariffs over a 12 month period.

So with that tariff revenue, should the Chinese decide they would like to try to boycott American agricultural products, we can buy the same amount of said agricultural products and essentially erase a huge amount of starvation in third-world nations by giving the products to them.

It will cost US Treasury zero to do that.

BTW $24 billion is about 0.12% of the US economy.  That is, the cost to you as a consumer of these tariffs is going to be a grand price increase of about 0.22% (annualized.)  You won't even be able to see that in the price of what you buy -- even more than doubled it will be less than one half of one percent in price increase, unless US firms try to gouge you -- and if they do then your correct response is to destroy the firms and executives who do that and ship their body parts over to China to be recycled by swine-flu infected hogs.

Done whining yet?  No?

Then maybe you can explain to me how keeping little kids from starving at the same time we stop China from stealing our intellectual property, protecting family farmers at the same time from being impacted, with an effective zero impact on prices you pay in the United States is bad?

I think it's delicious that in effect we can force the Chinese to feed a bunch of hungry third-world kids.

What do you think?

I think American farmers -- and in fact all American citizens -- should tell Xi to suck our collective dicks.

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Jal
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" .... third-world nations by giving the products to them.

It will cost US Treasury zero to do that."

Would it be better to give them a tractor factory?
Tickerguy
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@Jal - Yes, and I certainly understand the issue with the difference -- and that an awful lot of the "starving people" problem is self-inflicted injury. But that's an article for another time; I'm simply pointing out that the funds collected from these tariffs can purchase all the goods the farmers used to export, at the prices they used to get paid, and what we then do with said goods is up to us.

We could, for example, make SNAP no longer a "freebie card" but rather a ration of actual food. Or we could give it to starving kids in third world nations. Or, whatever else we want to do with it.

In addition the screamfest from certain people that consumers will "feel" these tariffs in materially higher prices is a flat-out lie. The numbers prove this; it's a one-time 0.25% increase in price. If it's more than that then someone is using the tariffs as an excuse to gouge you and the proper response to that sort of chicanery is to destroy the person or firm attempting it.

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Winding it down.

Flappingeagle
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I would consider going the "I am a real Son-of-a-Bitch" route and paying the farmers to fallow a significant amount of land. That way there is no using up of the land, fertilizer, and equipment.

The big benefit of going this route is to tell the Chinese, there will not be any food to sell to you if you change your mind.

Think about that sentence for a minute. Well, two seconds for the readers of this board.

Flap

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Here are my predictions for everyone to see:
S&P 500 at 320, DOW at 2200, Gold $300/oz, and Corn $2/bu.
No sign that housing, equities, or farmland are in a bubble- Yellen 11/14/13
Trying to leave the Rat Race to the rats...
Tickerguy
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I'm ok with that too, EXCEPT for one problem -- it can't be the amount of money they would have made in GROSS SALES on the farm products. They didn't do any of the work, you see.

So what's the average ag business NET margin on an acre of land? It's not the GROSS margin, because gross margin doesn't account for labor expense, for example, which you don't need either (and that's GOOD from a standpoint of getting rid of all those illegals too.)

But you do have a point -- that $20-odd billion might be able to be kept and instead ~$2-3 billion (which would represent a 15% net operating margin -- which I suspect is higher than what it really is) disbursed, with the rest going to deficit reduction. $20 billion isn't a lot in the deficit, but it's better than zero.

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Fumei
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I think the food aid ought to be dependent on the government of the recipient nation to publicly recognize the ROC as the sole legitimate government of China, deport or imprison any Red Chinese found in their territory after three days of the recognition, seize and sell off any assets left behind by those Red Chinese, including Chinese companies. The proceeds from the sales would be used for improving the agriculture and environment of the nation receiving the food aid.
Tickerguy
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@Fumei -- I like it! We can add that one to it as well.

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Winding it down.

Flappingeagle
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Just off of the top of my head, I suspect that a good bit of marginal land would be fallowed if the farmer was able to get a net of $100 per acre after all expenses. If the farmer is renting the land that would be rent payment plus $100.

That number is truly off the top of my head based on farming in the south east US. Obviously that could and will vary wildly across the US.

Here's a perhaps more valid number with quick math, if the all in price to the government was $250 an acre, a billion would idle 4,000,000 acres. (Please check my math.) There appears to be about 26 million acres of cropland in Iowa.

Let those communist leaders face the prospect of a hungry mob and see how tough they will negotiate.

Flap

----------
Here are my predictions for everyone to see:
S&P 500 at 320, DOW at 2200, Gold $300/oz, and Corn $2/bu.
No sign that housing, equities, or farmland are in a bubble- Yellen 11/14/13
Trying to leave the Rat Race to the rats...
Tickerguy
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@Flappingeagle -- The fallowing argument only works for a while -- the problem with it is that the premise is that the tariff will remain active in the form of actual levy against imports.

It won't; alternative supplies will be sourced from other places within a reasonable period. So you'll get the whole smash for the first year, probably, and then a lesser amount the next year as what was Chinese exports become some other nation's export.

You can't make the farmers dependent on it, but you can provide them a bridge. Thus the payments have to be tied inextricably to the tariffs and not be a general bit of welfare. If you can do THAT then it would be ok, but otherwise no, and I would go one further; put an acreage and ownership combination limit on it to prevent the big corporate farm outfits from getting anything at all. That one is a bit harder to do right but not THAT hard. I'm especially interested in making sure the folks that sold out to Chinese interests (e.g. Smithfield) don't get anything.

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Winding it down.
Asimov
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An acre of good farmland is, what, $4-5k on the very cheapest side?

If they're just making $100 an acre per year, all said and done, isn't that a bit ridiculous? Or $100/acre/yr AFTER considering the cost of the land? That still seems.... a bit on the low side.

Or did I miss something?

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It's justifiably immoral to deal morally with an immoral entity.

Festina lente.
Fumei
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I'm glad you do. I think the US military and CIA would like it to, since the Reds would be very tempted to use assassination and sabotage against any government that takes those actions, the US military and CIA could quickly be put into action to protect against such attacks. I have plenty of misgivings about the military industrial complex, yet it this case they could actually do some good.
Tickerguy
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It's beyond stupid these days @Asimov.

The entire game is leverage-based. That's what below-market interest rates do; they make this sort of bull**** possible. It CAN'T be done with market rates, because the cost of financing something is always positive and thus additive to just paying cash for the same thing.

But as soon as you can get "someone" to provide either cash or non-cash incentives to use leverage instead that's what will happen and suddenly there's ZERO "effective" cost for the land.

Consider that if nominal GDP is 3% and the cost of the money is 2% then you're GETTING PAID 1% to borrow the money! Now you literally DO NOT CARE what the price of the land is!

This of course makes the price go up A LOT, but it's not based on the value of the land or what it can produce. An acre of land that can produce $100 worth of finished product ex of expenses (that is, the profit of said acre is $100) has a cap rate of AT MOST 5-6x that, maybe 10x at the outside if VERY well protected (the 5-6x is because there's always the risk of a blown season whether through pestilence, insufficient or too much rain at the wrong time, etc) -- and thus it CANNOT sell for more than $1,000 WITHOUT such perversity.

You should be able to buy 40 acres of arable, tillable land for somewhere between $20,000-40,000 depending on how well protected it is against potential failure of said production (e.g. security of water resources, drainage, flood plain risk, etc.) Ha! Nowhere anymore in the US can you do that and it's ALL because of the programs put together by government that make the financing of said purchase available at a net negative rate of interest, which means you're PAID to borrow the money. If and when things go to **** SOMEONE ELSE gets the bill.

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Winding it down.

Gollum
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You could look at funneling a lot of the money towards conservation easements and turning a lot of the oversupply of farmland back in to forests. That would be a more permernent solution to our chronic overproduction problems, it would help to slow global warming (if one believes in that), and quite honestly turning a lot of America back to woods and prarie would make America a better place.
Asimov
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Karl: Uhg. I understood the concept but hadn't put two and two together.

Even more that makes me want a huge chunk of CHEAP land - distance, space and difficult to access, not farmland.

----------
It's justifiably immoral to deal morally with an immoral entity.

Festina lente.
Tickerguy
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@Asimov -- you're 30+ years too late.

By the time I had the money to execute on something like that it was too late for me too, which is why I didn't do it. The problem with it is that even by the mid 1990s, when I managed to amass enough capital to take a crack at something like this the risk profile had risen too much.

My parents consolidated two residences into one in 1995. That LOOKED like a decent move at the time, but it turned out not to be -- it was too late. A few months ago I sold said house -- for less than it was bought for in 1995, by quite a bit. Now granted, there was deferred maintenance and my sister's intentional destruction involved, but backing that out (neither of which was THAT extensive as the latter was confined to the master suite) it was STILL a net cash loss. What's MUCH worse is that if you took the compounded inflation rate into account the ACTUAL loss on the property was more than 30%, and I'm being kind here!

You may as well EXPENSE property at that sort of damage rate because to that CAPITAL loss you must add the property tax carrying cost over that period of time! Once you do that you're damn close to a complete wipe-out! By no means can you call any such thing an investment; you're better off buying 1,000 lbs of marijuana and personally smoking it all.

You'll note that the "fine folks" doing this bull**** at commercial scale now are NOT individuals -- they're corporations who are borrowing the money from someone else. The principals are fully insulated from the knowing, intentional loss they're engaged in but until it blows they get a nice salary kicked out of it. All of them know good and ******n well it will blow up too; the only actual suckers are the individuals who try to get into the game late -- most of them get utterly rat****ed as they're not insulated from the recourse side of it.

Monetary schemes like this are just like any other exponential scheme -- they are ALL Ponzi schemes, always. They ONLY work out for the people who get in when it starts and GET OUT before it blows up. If you're late getting in you are GUARANTEED a loss and not far into that point you're guaranteed not only a 100% loss you can lose more than you put in if the government can attach it and stick it to you a bit at a time. Once the screaming starts aimed at government keeping people above-water the loss is not only guaranteed it's going to be CATASTROPHIC and almost-certainly beyond 100% because you've now gone from capital impairment to operating losses which threaten to turn into immediate bankruptcies and foreclosures.

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Winding it down.
Mangymutt
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Karl - your orginal Ticker has segued from tariffs to farm subsidies and although very much related, they are two different areas, so lets take another step out.

Water rights, especially senior rights, farmers have been paid for generations now to farm at a loss. The next generation has no interest in it and they sell to big farmers. The big farmer doesn't care what happens to the land, but they can subvert the water rights to it.

Now if you farming on jr. water rights and want/need more water you have to go to big farmer, who isn't using his water, but you get to pay for it. Kind of like carbon tax scheme.

Flappingeagle
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Like is being said above, land that is now $3000 - $3500 an acre in southeast GA was $250 - $400 an acre in 1982-1983 when interest rates were very high. The price of land it appears is inverse to the interest rate. Ultra low rates mean ultra high prices.

Now, if rates ever go the other way...

Flap

----------
Here are my predictions for everyone to see:
S&P 500 at 320, DOW at 2200, Gold $300/oz, and Corn $2/bu.
No sign that housing, equities, or farmland are in a bubble- Yellen 11/14/13
Trying to leave the Rat Race to the rats...
Tickerguy
Posts: 157213
Incept: 2007-06-26
A True American Patriot!
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@Flappingeagle -- look at the real GDP chart I've published and you'll see the problem; land gets bid FAST in such a scenario because the more money you borrow the more you get PAID!

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Winding it down.
Wa9jml
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DeKalb, Illinois
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Some years ago, I bought 36 acres up in north central Wisconsin for the purpose of building a modular house, and retiring there. If you go about 30 miles north of my place, farms give way to forests. I have a Mennonite organic dairy farmer using the arable parts of my land to grow silage corn. The rest is heavily timbered.

Wisconsin went Bolshevik in their last election, and I also realized that I am no spring chicken these days, and hence am not pioneer material any more, either. So keeping up a place there is pretty much out of the picture now. I also expect that we are entering a solar minimum, so the winters there are going to be even more severe than they are now. They sure were when my mother grew up out west of there in the 1920s and 1930s.

The local hospital is first rate, but the VA Hospital there in Tomah, Wisconsin has been a snake pit for many decades. I am expecting Medicare to go belly up in the next 5 years or so. So the VA might survive the implosion, but if I want decent medical care from the VA, I would have to drive to Madison about 3 hours away in good weather.

I tried several vendors of modular houses, and all of them wanted me to pay more than $300k for a modest cabin, not counting putting in the long driveway, nor trenching in the utilities. I could buy a much nicer existing house up there for substantially less money. And, I would be taxed on the price of the house, which would make for a substantial property tax bill each year.

The price of that land has declined a bit from when I bought it.

So, I will keep it for a while, but I have given up on building there.
Themortgagedude
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Saint Charles MO
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Our rate of return is generally about $300 an acre. We our somewhat decided farmers and my cousin does the work for us on a custom basis. Costs is about $75 an acre for all the tillage, harvesting and grain hauling. This is in Southern Illinois. Our ground would bring about $6000 an acre. If you go to Champaign IL you are looking at about $12000 an acre. Marginally more productive ground brings a lot higher price.

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I think its time we ask ourselves if we still know the freedoms that our founding fathers intended for us. Ronald Reagan 1964
Themortgagedude
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Low rates do drive the values. Farmers are generally wealthy and older or younger and leveraged. The old farmers can't get more than 1% at the bank. So in my scenario above they get a 4-5% return. And some of it is they don't want their neighbors to buy it and it becomes a bidding war. I've seen ground to at action for $3000 - $6000 more than it should have.

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I think its time we ask ourselves if we still know the freedoms that our founding fathers intended for us. Ronald Reagan 1964
Tickerguy
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$300 net or $300 - $75 = $225?

20x cap? Ye be nuts.

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Winding it down.
Asimov
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So 20 year payoff on an acre of land.

Wow. This **** is ****ing ****ed. I had no idea it was that bad.

----------
It's justifiably immoral to deal morally with an immoral entity.

Festina lente.
Tickerguy
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Nuke SW illinois

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Flappingeagle
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Quote:
@Asimov -- you're 30+ years too late.

By the time I had the money to execute on something like that it was too late for me too, which is why I didn't do it. The problem with it is that even by the mid 1990s, when I managed to amass enough capital to take a crack at something like this the risk profile had risen too much.


The exact same thing happened to me for two reasons. One of my own making and one of circumstance.

I did not realize what would happen when interest rates fell so, I went to grad school thinking I had time. I should have gone into sales using my engineering degree right away and would have been able to afford that farm I wanted.

The circumstance I could not control? I was born toward the end of the baby boom, the early boomers beat me to almost everything.

Flap

----------
Here are my predictions for everyone to see:
S&P 500 at 320, DOW at 2200, Gold $300/oz, and Corn $2/bu.
No sign that housing, equities, or farmland are in a bubble- Yellen 11/14/13
Trying to leave the Rat Race to the rats...
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